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How Peer-to-Peer Lending Works

If you are inquiring about peer to peer lending for the first time, then there are a few things that are important to know before you get started. There is a difference between standard borrower and investor style relationships when using peer to peer lending, but in essence, they are actually quite similar. Here are some important things you should know before getting started as either a borrower or as a lender.

Basics of Peer-to-Peer Lending

Peer to peer lending is very similar to borrowing money from a friend. The biggest difference is that the peer to peer lending process is done entirely online. While the people that you are borrowing from or lending money to may be similar to friends needing or lending money, they are actually people that you do not know directly. Typically there is a little history given to those lending money by the people seeking money, but this is not always a necessity.

Type of Protection

One of the most common types of security in place is the limits most websites put on nearly all of the investments by a single investor. This helps protect their investment if the loan is ever defaulted on. Another type of protection that is put in place is the high credit score requirement. Since this is a loan that is not typically based on any type of collateral, there needs to be some basis of trust for lenders to feel safe investing their money into it. This usually leaves the minimum credit score requirement in the 700+ range, but exceptions are made on occasion. The biggest protection that is put in place is in regards to the way that each loan is funded. Most of the time, loans are made up of small investments by numerous investors. Sometimes hundreds of investors are behind a single loan, making it to where the repayment is slow, but the risks are also minimized.

Kind of Returns

Investors can start off by lending as little as $25 for most places, and that is often the max that is considered to be safe to put in any single lending transaction. If the person borrowing the money decides for whatever reason not to repay, then the investors are only out a slight amount of money until the protections put in place collect that money back. Thankfully, this is not often the case. Most of the time investors get their money back, plus an average of eight percent back on the amount of money that they invested. This is the biggest perk that most investors see when it comes to peer to peer lending.

Peer to peer lending is quite similar to other online loan sources on the surface. You go through the application process, find out where you can get the money from, have it put into your account, and then make repayments for the next few years, depending on the size of the loan. However, giving a few cents or dollars to each of the investors with each repayment you make gives them the peace of mind that their investments are safe, plus helps you keep your credit in good standing. If you plan on investing in these types of loans, do what you can to keep your investments safe and diversify them between different opportunities. The repayments you get from each loan you invest in will help repay the money you borrowed out, plus it will give you the return you can count on well into the future, so you can continue to grow your initial investment.

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